Today’s Blog – Tuesday 7th June 2016

We noted yesterday that the Chairman of Shell Australia’s speech at the APPEA conference had echoed our view that a floating storage and re-gasification unit (FSRU) could be viable on the East Coast of Australia.

Comment on this speech has focused on its utility in telling politicians that their dumb policies could lead to such an embarrassing outcome – an LNG exporting country also having to import gas would be a laughing stock.

Indeed, Matt Stevens the influential columnist in the Australian Financial Review, stated in his analysis of Mr Smith’s speech that:

“Critically, there is nothing in the gas market that would incentivise Shell or anyone else to actually install re-gas capacity in molecule-short NSW, let alone gas-long Victoria.”

We disagree – there are a couple of things in these gas markets that do support a FSRU concept, as follows:

LNG spot prices in Asia have been as low as US$4 (say A$5.60). Australian gas prices – in both Victoria and New South Wales are higher than this – say A$7+. A clear arbitrage trading opportunity therefore exists.

FSRU’s have enormous deliverability capability – analogous to high quality gas storage assets. One of the latter sold in Victoria last year for the princely sum of A$1.8B.

So although we agree the concept is a dumb outcome from a macro level – someone could still make money out of a scenario which has basically arisen due to the massive over-build of liquefaction capacity as well as short term thinking (are there any other kind) State politicians.

Stay tuned on this area – we have been working up a full scale report on the topic for interested parties (under very generous terms, naturally).

Commodity prices

Crude prices performed strongly over-night, with the magical level of US$50 again being breached by Brent – which closed up nearly 2% at US$50.50. WTI is getting close to this barrier as well, with a similar increase in price to finish at US$49.69.

The drivers of the day were Nigerian “events” (supply cuts) and Cushing “numbers” (inventories falling) as well as the Fed signalling a pushing out of US interest rate rises and hence dampening the dollar.

Henry Hub is still on a tear – it closed up ~3% to close at US$2.47 – up ~25% in the last three weeks. The main driver here is falling US production (at a time of increased exports) – a nearly 3% decline in the last 3 months.

LNG and international gas

Japanese company JX Nippon recently announced that it would make a ~US$0.5B investment in a new LNG train to be constructed by Malaysia’s Petronas on Borneo.

To give a feel for the large size of the investment – that is around half the amount that Malaysia’s Prime Minister mistakenly found had been “resting” in his private bank account.

JX Nippon will market the gas from this jointly with Petronas – most interestingly not just to Japan – but to a whole array of South-East Asian countries.

Are staid old Japanese companies actually being more pro-active in the brave new world of LNG liberalisation than Australia’s (wounded) E&P companies?

Governments, fracking, etc

The current APPEA conference has provided platforms to a number of parties who have warned that limitations on CO2 emissions will require the oil and gas sector to respond dramatically. One speaker went to far as to say:

“The Paris conference sounded the death knell for the fossil fuel industry” – Elliot Diringer, US based Centre for Climate and Energy Solution

We suggest that Mr Diringer go and check: the policies of the Republican candidate for President; the weakness of the Democrat’s likely candidate; the composition of the US Congress; and, the US Constitution.

We think there is only slightly more than a 50% probability that the US will follow the outcomes of the Paris conference – and a close to zero chance that the Senate would ratify a treaty to that end.

Company news – various at APPEA

The media has earlier today reported that the CEOs of various companies including Santos (STO), Woodside Petroleum (WPL) and Chevron (CVX) have made speeches at APPEA with a common theme: “the dog ate my homework”.

All have lamented the high costs, delays and failures to cooperate in the Australian LNG sector over the recent cycle. Perhaps they might ask their various Chairmen and other Directors who presided over the various key decisions and who are still around what their rationale was? Perhaps not.

Company news – AGL

AGL announced yesterday that it would no longer moth-ball some of the the old gas fired units at its Adelaide based Torrens Island power station. This could be seen as a victory of gas over coal – given the recent closure of South Australia’s only coal fired power station at Port Augusta.

We however see this as a victory for the suppliers of energy deliverability, flexibility and storage – e.g. gas storage assets such as those in the Cooper Basin and Iona (or floating ones to come). Torrens Island will not use that much gas over the course of a year – but it will call for a lot of gas on particular days.

Company news – Cooper Energy (COE)

COE announced today that it agreed to sell its producing oil assets in Sumatra for US$4.3M.

That is around US$2.60 per 2P barrel by my calculations – a low figure reflecting a particularly harsh fiscal regime. That harshness was also reflected in the fact that COE managed to sell its exploration PSC (which had much better terms) for more than this producing asset.

The buyers appeared to be private equity types – who could possibly sweat the asset in more “flexible” ways than could COE.

Quote of the day

STO’s Chairman Peter Coates at APPEA earlier today:

“But you all know the old saying that what doesn’t kill you makes you stronger.”

What he didn’t say is that the full original quote from Friedrich Nietzsche was as follows:

“That which does not kill us makes us stronger – unless you conduct a highly dilutive rights issue at the bottom of the cycle.”